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What Is Seasoning Of Title And Why It Matters
Seasoning of title, or also often referred to as title seasoning, is basically a real estate industry jargon to describe the amount of time a seller has ownership over a title to a property.
Usually, seasoning requirements are placed by lenders on mortgage transactions in an effort to prevent types of mortgage fraud that are sprucing up all over the place.
The fear by lenders is especially present when they are dealing with the funding part of double-closing real estate deals that are frequently practiced by property flippers.
While double closing is not illegal, the way it is structured can leave loopholes for scammers to exploit.
For example, an unscrupulous flipper might buy basement bargain priced houses and stage them up to sell to unsuspecting buys at inflated prices.
After which, in order to obtain a loan to fund the deal for the buyer, unethical professionals like appraisers and mortgage brokers submit fabricated loan documents in order to get the mortgage approved.
The end result is that what remains will be a new homeowner who paid way more than what the property is worth, and a lender who have finance more money for a property is worth nowhere near the loan disbursed.
By requiring a time of ownership through the use of title seasoning criteria, lenders are effectively and indirectly rejecting loan transactions that involves 3 parties consisting of 2 sellers and one buyer.
In this way, they refrain from declaring a direct rejection of such deals and can take on such deals on a case-by-case basis.
By placing seasoning requirements on a seller’s ownership, which can be as short as 3 months or as long as 12 months, it deters scammers from doing what they do as they have to complete such deals in less than 3 months in order to pocket maximum profits with minimal investment capital.
Saying this, it is important to realize that the lenders cannot be blamed for protecting their interests and assets.
The silver lining is that most lenders do not have a problem with double closing or other forms of unconventional real estate deal structures and will assess the merits of loan applications without needing seasoning of title requirements to be met.
At the same time, government policies often have tax requirements in place to deter real estate investors from flipping property.
When you run into a situation where the 3-way deal you are involved in does not meet seasoning requirements set by a lender, there are basically 2 options available to select from.
1) Assign the contract
It is possible to assign the sales agreement to the final buyer.
It would function like a traditional option transaction where the new owner of the contract to buy is the ultimate end-buyer.
This means that the flipper is removed from the whole deal and the original seller will deal directly with the end-buyer for closing.
However, this presents a whole new problem to the flipper.
Will he even get paid?
By not being involved in the deal any longer, the is every chance that the middleman will be forgotten and every opportunity for the seller and buyer to do so.
If they didn’t initially know that they were getting into a double closing deal and unhappy over it, they might find leaving out the middleman as a way to exact revenge.
And what if the end-buyer comes into agreement to purchase the property from the original seller at the below market price the middleman agreed with him initially?
This means that there is no spread left for him to bank in.
In such instances, the presence trust is paramount to the middleman getting paid.
2) Buyout from original owner
The second option is a much better one with a lesser probability of getting screwed over.
If you are the middleman, this involves having the buying you out of the deal that has been agreed between the two of you.
Inform the seller that you’ve found a new buyer willing to buy at a better price. Then negotiate for a good price to buy you out of the deal.
If that fails, it could be time to explore how to trigger your contingency plans.
By default any real estate investor should have clauses and conditions inserted into sales contracts to protect their investments.
When a seller agrees to sell to a buyer, the option-to-purchase or sales agreement should have terms that stipulate penalties that either party has to incur should they fail to fulfill their end of the deal.
If the price that the new buyer is willing to pay is way more than the penalty fee that the seller would have to pay you for backing out of the deal, that it is a very good factor to convince why the seller should by you out.
A much higher sales proceeds should be reason enough to take up your offer.
The amount of work involved is the same whether he is dealing with you or the new buyer. So why not get paid better.
If the seller is not willing to pay you with cash upfront and insist on the completion of the deal before paying you, you have to either trust him or put the agreement in writing via a promissory note.
This would make you a lien holder on the property and ensures that you will get paid.